New entry requirements for UK financial institutions increase competition and benefit customers

Bank of England

The Bank of England, which stands at the centre of the UK’s financial system, revealed on Monday that financial service industry regulators the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) have published a review of measures taken in 2013, which were designed to reform and simplify the authorisation process for new banks.

Following the changes, a number of positive developments mean that competition in the banking industry has increased and banking customers have benefited.

Five new banks were authorised by the PRA between 1 April 2013 and 31 March 2014, including: Axis Bank UK Limited; Union Bank of India (UK) Limited, FCMB (UK) Limited, UBA Capital (Europe) Limited and Paragon Bank plc.

The number of firms discussing the possibility of becoming a bank with the regulators has also substantially increased, with the regulators having held pre-application meetings with over 25 potential applicants in the twelve months to 31 March 2014. These include firms with various business models, such as retail and wholesale banking. FCA-regulated Payment Services firms are also applying for authorisation to enter the banking market. These firms propose to offer deposits and lending to their current client base (including small SMEs); while others want to provide a mixture of SME or mortgage lending funded by retail and SME deposits.

A new ‘mobilisation’ option, where authorisation is granted when a firm has met key essential elements but their activities are restricted because some areas still need to be completed, has been found to be helpful for applicant firms that may have faced challenges in raising capital or investing in expensive IT systems without the certainty of being authorised. In the year ending 31 March 2014, the review found that three of the five newly authorised banks used the mobilisation option, while several firms in the pre-application stage have also shown an interest in this option.

Capital and liquidity requirements for new entrants are now lower at GBP1m, in comparison to the GBP5m previously required. However these requirements are set against a requirement for a firm to show the regulators that it has a clear recovery and resolution plan in place in the event of future difficulties.

Andrew Bailey, chief executive of the Prudential Regulation Authority commented:

“It is clear that the changes introduced last year have been positive for new entrants and will make a contribution to increasing competition and thus benefit customers. Reducing barriers to entry can be achieved alongside continuing to ensure new banks meet basic standards that prevent risks to the safety and soundness of the UK financial system. The feedback we have received from the new banks has been very encouraging.”

Martin Wheatley, chief executive of the Financial Conduct Authority added:

“The changes will ultimately offer consumers greater choice and encourage innovation. In any sector newcomers to the market bring fresh thinking, and challenge established firms to consider how they can offer a better deal or improve the service they offer. I’m keen we maintain this progress, and want to see greater competition in retail banking work for the benefit of consumers.”

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